The Pros (and Cons) of Purchasing in a Gut-Renovated Condo Building

Features in historic renovations are often too expensive to be replicated

While new construction reigns supreme in many cities with robust luxury markets, there are also plenty of gut renovations in the works in New York and London, resulting in high-end condominium sales in historic buildings.

So, which one has the better value?

“Fundamentally, there’s no reason why a comprehensive refurbishment shouldn’t technically compete with a new build,” said Ian Marris, the head of residential development at London’s Knight Frank. “But the reality can often be very different, and in many cases, favor the new build.”

Though there’s a perception that starting from an existing structure is faster to turn around and easier to complete, the opposite is often true.

“Even though the building already physically exists in historic restorations, there are often conditions that developers can’t anticipate that make gut renovations more difficult to complete,” said Angela Ferrara, the executive vice president of sales and leasing at The Marketing Directors, a company selling units in a new restoration project at 49 Chambers in lower Manhattan.

Mr. Marris agreed, noting that new construction provides a developer with a clean slate and an open template to build something high quality, modern, and fit for their target market.

“When you have constraints linked to historical protection, whether those impact structure or other characteristics, they can prevent a developer from achieving the optimal design,” he said.

Gut renovations have history on their side

There is one area in which new builds will never be able to compete with gut renovations: history.

When it comes to historic elements and features that lure buyers, a stunning exterior that would never be built today is often a huge draw.For instance, at 49 Chambers, a 17-story, Beaux-Arts style structure built in 1912 for the Emigrant Industrial Savings Bank, the building’s unique H-shape that lets light into interior spaces is what’s most appealing, Ms. Ferrara said.

The Beaux-Arts styled facade of 49 ChambersWilliams New York

“This building would be too expensive to recreate,” Ms. Ferrara continued of the project, which will have 99 one- to three-bedroom condominiums when it’s completed next summer, “and you would never find this type of beautiful façade in any new construction project.”

At 171 Columbia Heights on the Brooklyn Heights Promenade is another historic Beaux Arts-style building. Constructed in 1903 as the Standish Arms Hotel, and more recently offered as 100 rental units, today, DDG, an investment, design, development and construction firm, and Westbrook Partners, a New York-based private equity firm, are reimagining and refurbishing the building as 29 luxury condominiums calledThe Standish.

What’s unique about the building is its height—12 stories in a sea of four- and five-story structures, which means unobstructed views of New York Harbor, the Statue of Liberty and the Verrazano-Narrows Bridge—said Joe McMillan, DDG’s CEO and chairman.

The beautiful exterior, with its mix of brickwork, terra cotta and limestone, also stands out against other neighborhood buildings, as does the interior period design elements you aren’t likely to find in new construction, like steel columns and original brick fireplaces, which will now serve as the focal centerpiece of many units.

A rendering of The StandishFamiliar Control

“The beauty of restoring an old structure is that you can really bring out its character and embrace the qualities that have always been there,” said Mr. McMillan, noting that historic buildings like this are almost impossible to come by in other markets, which is why he sticks to new construction in San Francisco and Palm Beach, where DDG also has offices. “With a restoration project, the goal is to embrace and accentuate what was first conceived of more than 100 years ago.”

On the East River waterfront at 184 Kent Ave. isAustin Nichols House in Williamsburg, Brooklyn. When it was built in 1915, this reinforced concrete, low-rise warehouse, designed by famed architect Cass Gilbert in the Egyptian Revivalist style, housed a major New York City grocer. The building later received landmark status, was added to the National Register of Historic Places, and was converted to rental apartments in 2008.

Rendering of an interior space at the Austin Nichols House in Williamsburg, BrooklynAustin Nichols House

A few years ago, LIVWRK, a Brooklyn-based development company, started restoring the building and converting its rental units to luxury condos, highlighting the exposed beams, 12-foot ceilings and windows that bring in the natural light and air from the waterfront. So far, about 100 of the 160-plus for-sale units have sold, the first of which are closing now.

“We accentuated the building and paid homage to its history, but really elevated the aesthetic and the interiors,” said Asher Abehsera, LIVWRK’s founder.

“When you convert a building like this,” he added, “there’s a type of buyer who’s waiting for something like it to come to market. And they’re usually not comparing historic restorations to new, glass towers.”

In many cases, though, the historic features that attract developers to take on a restoration are the same things that make the project difficult to manage.

“When you’re doing a ground-up build, you have a clean canvas, and you can take a project in any direction that you want,” Mr. McMillan said. “But when you’re doing a restoration or renovation of an existing building, you’re working with a canvas that was created many, many years ago.”

That could mean small rooms, an odd layout, or other quirks that make it impossible to construct what developers originally had in mind. “In many ways, it’s more challenging to go back to something that was there originally than to start from scratch,” Mr. McMillan said.

A restoration can also turn out to be much more expensive to undertake than a developer originally thought it would be when construction reveals myriad unforeseen design challenges that tack on costs.

“While you can budget for the known, you can’t budget for the unknown,” said Mr. Marris. “This makes the complexity of refurbishment infinitely greater.”

The most discerning luxury buyers today now expect hotel-like amenities in any building they’d consider. But often, things like swimming pools, high-end gyms, outdoor terraces, and underground, valet parking can be difficult, if not impossible, to retrofit into restorations. In the end, this means that historic restorations can take a hit on price.

In London, for instance, two structures on Regent’s Park—one a historic restoration and the other a new build with an exterior that recreates what the previous, historic structure looked like—illustrate this point perfectly, and show the cost increase that amenities can provide.

Both developments are part of London’s only Royal Crescent, which connotes an architectural style with a semi-circle of connected, terraced homes. Designed at Prince George’s request by architect John Nash in 1811, this structure was completed in 1820, just as he was crowned King George IV, and moved to Buckingham Palace. At that point, the Royal Crescent became an in-demand address for London’s elite. Units were later converted into apartments after World War I; restored in 1960, after suffering damage during World War II; and then used as offices until 2013, when the building was purchased by developer Amazon Property.

Park Crescent East, now known asThe Park Crescent, recently underwent a massive refurbishment, and was sold as 20 two- to four-bedroom residences, at between £2,000 (US$2,590) per square foot to £3,500 (US$4,533) per square foot, with most falling in the £2,000 to £2,500 (US$3,238) per square foot range, said Simon Deen, director of new homes at London-based real estate agency, Aston Chase. The final penthouse, listed at £6.75 million (US$8.74 million), is still for sale.

Park Crescent West across the way, which is soon to be renamed Regent’s Crescent, has been knocked down and is in the process of being rebuilt. Now selling off-plan with units set to be delivered in 2020, the price per square foot is substantially higher, at £3,500 to £4,000 (US$5,180) per square foot, with the average falling around £3,800 (US$4,921) per square foot, Mr. Deen said.

What’s different? For one, the new build side will have underground parking and leisure amenities, like gyms and swimming pools, plus security features that couldn’t be added to The Park Crescent, Mr. Deen said.

And while historic features, like high ceilings and the period exterior architecture, would typically set The Park Crescent apart from its brand-new rival, in this case, that isn’t true, as Regent’s Crest will have the same exterior look as the original structure. “In this case, you get all the things you can expect with a new build in a structure that looks like it’s been there for hundreds of years,” Mr. Deen said.

Many New York developers have found ways remain competitive with new construction, and include amenities that you’d typically find in ground-up builds, but they can only go so far.

While it’s impossible in many cases to add a terrace or outdoor space to individual units, residents can take advantage of a shared roof deck, as The Standish, Aston Nichols House and 49 Chambers all have.

Each building also has other in-demand amenities. 49 Chambers, for instance, has a mosaic-tiled swimming pool with an adjoining whirlpool, a children’s area and tween lounge, and a virtual golf simulator, while Aston Nichols House has a parking structure, an indoor/outdoor courtyard with a fire pit and floating Zen garden, and a co-working space and resident café.

Many successful New York developers have also picked up on buyer interest in purchasing in what looks like a historic building, even when it’s not, experts say. A perfect example is 15 Central Park West, which has an old-world look and is considered one of the most successful condo sell-outs ever in New York, Mr. Abehsera said. The lofts at 443 Greenwich in Tribeca are another example of this phenomenon.

Historic restorations may mean more risk

Another reason both buyers and developers are drawn to new construction projects is that in many cases, they come with less risks.

“If you’re purely buying for investment,” said David Galman, the sales director at Galliard Homes Limited, a residential property developer in London, “it’s often going to be much easier and more financially sensible to purchase something brand new.”

This is because most renters would rather have something compact and convenient over something with character, he said. So, if you’re buying to rent, purchasing in a new build off-plan is a solid tactic.

“When it comes to historic restoration projects,” he added, “you’re not always going to get great rental returns.”

Mr. Marris agreed, noting that it takes a more sophisticated investor to determine which historic restorations are worth taking a chance on. “For this reason, moving into a new build probably represents the least risky option,” he said.

But outside of rental income, buyers can expect resale value to increase at an even rate, regardless of whether they’re in a historic restoration or new build, Mr. McMillan said. That is, if the property is in a great location, with solid design and quality construction. “These factors will increase a property’s value regardless of its type,” he said.